Orange County Register

Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

Mitch in Dallas, TX asks:
Q. I purchased a home for $110,000 in 1978 now worth somewhere between $750,000 (tax appraisal) and $900,000 (low end of comps in area). I refinanced with cash out for $200,000 with a home equity mortgage in 2002 at 6.2%. I would like to borrow $160,000 for improvements. What’s the least expensive way to do this? Also, we never had escrow payments but I’ve been told I’ll have to pay .25% to avoid escrow even though we’ve paid everything on time without escrow payments since 1978. Is that true?

A. I think that you are astute in seeing that there is some rate risk implicit in having the home equity loan. It is likely tied to the volatile prime rate. Even if you didn’t need money for another project, it would still make sense to refinance. Here’s how I define “least expensive.” It means paying the least for the total of upfront costs and interest over, say, the next ten years. Doing a zero point loan lowers immediate costs but adds to the interest costs much, much more than you saved initially. Choose any reputable lender for this. I always suggest asking friends for references

As to the added cost for not having an escrow account for impounding your taxes, many lenders have this policy, but others don’t. In some states, such as California, a lender can’t require it unless loan-to-value exceeds 90 percent. But the law doesn’t say they can’t charge. By the way, lenders like escrow accounts because so many people simply don’t pay their property taxes on time and then the lender has to chase them to get them to do it. If the lender controls the process, they don’t have that worry.

Cathy in Garden Grove asks:
Q. I live in a small two bedroom townhouse with my family of four. We are clearly outgrowing our home but with the way the economy and housing market have been going, we don’t think it would be a good time to buy or sell. We had a five-year hybrid ARM that became adjustable in April. My mortgage payment has actually dropped almost two hundred dollars since then. I am told that my reduced interest rate is locked in for a year and then it adjusts again, which horrifies me. My first question is should I refinance and when, and what type of refinancing will fit my short-term goal? I am enjoying the savings during these hard times. My next question is: I have always paid an additional one to two hundred dollars more towards my monthly mortgage, should I continue to do this? I also have a large home-equity balance that I have been trying to pay down. I have been paying just the interest on the balance owed but have recently started to pay an additional five hundred dollars a month towards the principal. I have tried to stay ahead of the game but am wondering if it’s even necessary at this point. We owe a combined $343,000, and the current value of the home is $341,000.

A. First, I congratulate you on making prudent financial moves that have protected you from going under water. That said, you also obviously do not have any equity to use to buy another home. So let’s deal with your situation. With rates so low, you are certainly not in rate jeopardy for a little while. Unfortunately, you are in a Catch-22 situation that our experts who make policy in Washington didn’t consider. Fannie Mae and Freddie Mac have special programs that would theoretically allow you to refinance into a fixed rate loan even though the loan-to-value is high. However – here’s the catch – they will not allow paying off your home equity loan. They will allow you to subordinate that loan, but it is unlikely that the holder of that loan will want to do a subordination with no equity.

That does not mean that you shouldn’t ask that lender if they will subordinate. Check to see if your loan is owned by Fannie or Freddie by looking at their Web sites. In the meantime, I think I would be more inclined to put that extra money into a special savings account rather than pay down your loans further. There’s just too much crazy stuff going on in the finance world these days.

That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question.

Johnson will answer up to three questions each week, so keep checking back for a response. If many questions are submitted, it could take a while to get a response, or he may never get to it. Also, readers keep submitting variations on the same question, which has already been answered: what to do when you can no longer afford your mortgage. I have decided not to publish most of those questions, because they are repetitive, although I appreciate the difficult situation many homeowners are in these days.

Read prior questions and answers by clicking on the headlines below…

• Have your lender fund retirement
• Reader considers defaulting to get lender’s attention
• Reader discovers appraisal irregularity
• Time to ditch California for cheaper living?
• Reader debates paying mortgage after down payment evaporates
• Will ‘walking away’ from an investment property hurt you?
• Can a lender demand a second appraisal?
• Income windfall … save it or pay off mortgage?
• Can you get a mortgage with social-welfare income?
• Is it harder to get loan aid from some lenders?
• Think twice before using one mortgage to pay another
• Buying an investment property? Some loan tips…
• Is paying off a mortgage the best option?
• Loan help, or loan shark?
• Answers for first-time home buyers
• Time to double-down on housing?
• Refinance to survive a cash-flow crunch
• Rainy day fund vs. lower mortgage payment
• Is ‘walking away’ from a home justified?
• Real estate investors get no sympathy
• The case for buying a home now
• Bigger home loans coming to O.C.
• A complicated mortgage that could fund retirement
• Loan doors open for serial housing investors
• Forget dodging refinance fees
• No job, no refinancing
• Avoiding a rate hit on an investment property

Find out more about: MORTGAGE ANSWERS | MORTGAGE RATES | FORECLOSURES | HOME PRICES | INVENTORY | RENTS | FED |

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